Says it is unusual for the RBI to be driving state banks to raise provisioning so quickly, and indicates that earnings pressures will continue in Q4 and possibly beyond
Mumbai : Fitch Ratings warned that standalone credit profiles of many Indian banks “should come under pressure” unless there was “meaningful” action to restore their capital adequacy.
“Fitch’s estimated capital need for the system of $140 bln may need to be reassessed, given some of the losses,” said the ratings agency. However, it added that the revision should only be “slight”, considering it has assessed India’s banking system on a stressed-asset basis, and not non-performing assets.
Fitch’s warning comes after Standard & Poor’s cut its outlook on Bank of India to negative from stable on Tuesday, warning that further deterioration in its asset quality could lead to a rating downgrade. Last week, Bank of India reported a massive net loss of 15.05 bln rupees for the quarter ended December, the second consecutive quarter in which it had reported a loss, as provisions and contingencies more than doubled year-on-year to 36.04 bln rupees.
State-owned lenders’ already-battered balance sheet took a further beating in Oct-Dec following the Reserve Bank of India’s asset quality review, which led to 11 public sector banks reporting losses for the said quarter after the central bank advised lenders to provide for accounts which may not be NPAs on their books, but have turned bad for other banks.
The process, termed “deep surgery” by RBI Governor Raghuram Rajan as opposed to temporary relief measures, comes as Indian banks have been set a deadline of March 2017 to clean up and have fully provisioned balance sheets.
“It is unusual for the RBI to be driving state banks to raise provisioning so quickly, and indicates that earnings pressures will continue in 4QFY16 (Jan-Mar) and possibly beyond,” Fitch said.
The agency added that the central bank’s intention to clean-up bank balance sheets by March 2017 as a pre-requisite to kick-start credit growth could help to “revive investor confidence” in public-sector banks. It also noted that there was “quite a high risk” that some smaller banks’ core capitalisation may fall below regulatory norms.
ICRA cautions
Ratings agency ICRA Ltd has cautioned that post the recent deterioration in asset quality of state-owned banks, there could be rating actions reflecting the changed outlook on their credit profile.
ICRA believes that the sharp rise in non-performing assets will impact earnings and solvency profile of state-owned banks over the next 2-3 years, along with hurting ability to tap markets for debt and equity.
ICRA said that state-owned banks gross non-performing assets have risen to 7.1% on Dec 31 from 5.6% on Sep 30, and are expected to worsen further in Jan-Mar due to residual impact of the RBI review.
ICRA said that if the government restricted its capital infusion to just 700 bln rupees for the same period up to 2019 then several state-owned banks “could have restricted growth leading to further pressure on their credit profile”.
